Should We Worry About Income Gaps Within or Between Countries?

The rise of populist nationalism throughout the West has been fueled partly by a clash between the objectives of equity in rich countries and higher living standards in poor countries. Yet advanced-economy policies that emphasize domestic equity need not be harmful to the global poor, even in international trade.

CAMBRIDGE – At the beginning of classes every autumn, I tease my students with the following question: Is it better to be poor in a rich country or rich in a poor country? The question typically invites considerable and inconclusive debate. But we can devise a more structured and limited version of the question, for which there is a definitive answer.

Let’s narrow the focus to incomes and assume that people care only about their own consumption levels (disregarding inequality and other social conditions). “Rich” and “poor” are those in the top and bottom 5% of the income distribution, respectively. In a typical rich country, the poorest 5% of the population receive around 1% of national income. Data are a lot sparser for poor countries, but it would not be too much off the mark to assume that the richest 5% there receive 25% of national income.

Similarly, let’s assume that rich and poor countries are those in the top and bottom 5% of all countries, ranked by per capita income. In a typical poor country (such as Liberia or Niger), that is around $1,000, compared to $65,000 in a typical rich country (say, Switzerland or Norway). (These incomes are adjusted for cost-of-living, or purchasing-power, differentials so that they can be directly compared.)

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Strewth…..This just proves to me ….again….that economists should stop trying to manage any economy or make policy…. Please go back to your universities and stay there….

The issue is that we have an intrinsic amount of wealth and scarce resources to share and that we are in the age of over-supply of labor with at the last count the global labor supply growing twice as fast as we can create true economic wealth just to break even…

Also, we have 25% of the global population un or under employed and that rate growing, so how the heck with the population growing at 5% per year are we supposed to employ them so they can share in the wealth…

Globalization which was supposed to help to stave off poverty has increased 8 times since 1980 while global trade has only increased 3 times, so don’t expect this very inefficient wealth transferring machine to get this job done.

And, the western population has already wised up to this wealth transferring global trade game and open borders allowing migration are also going to close.

The only viable solution mainly for the rest not the west is significant birth control!

"probably the single best way to raise incomes in the rest of the world would be to allow a massive influx of workers from poor countries into rich countries’ labor markets" This would (eventually) lead to a form of equilibrium in the labor market. But a free market in labor within the US, in the absence of such supportive systems as equal education, equal health care and equal social networks, has not led to equality -- far from it. Moreover, the free international movement of labor would lead to devastating poverty in the poor places left behind, similarly but to a greater extent than the poverty in rural areas of the USA.

The problem always for general equilibrium analysis and wealth comparisons such as this is that relative wealth matters more than absolute wealth. We must normalize such comparisons for purchasing power parity and general cost of living indices. For instance, an assistant professor at Stanford making a competitive academic wage finds it difficult to compete for housing with Google and Facebook employees who have stock options. This is generally true for all dense urban areas, not just Silicon Valley or Manhattan.

Allowing massive immigration of workers from poor countries into rich countries was what accelerated the development of the USA in the 19th and 20th centuries, but alas, today, this strategy would unleash massive and dangerous opposition in any rich country, especially the USA. What is needed to level off income and consumption and wealth inequalities within and between nations are Development programs harnessing not only national governmental organizations but multilateral ones, capable of contributing to orderly and broadly financed private investment, particularly in a North-South direction, globally, along three axes, to wit Asia-Oceania, North America-South America, and Europe-Africa. An example of this construct is: "A Partnership for Development with the United States of America":

Mathematical Model and Simulation for "A Partnership for Development with the United States of America" that would articulate Private Sector and Public Sector entities pertinent to environmentally-friendly holistic socioeconomic development in the American Hemisphere, bringing together its 35 nations, in a concerted effort to reduce and eliminate the existing ominous welfare gap, led by the Private Sector, for profit. Model and Simulation developed in Excel in 1999, and subjected to its subsequent versions through Excel 2003 and its updates through 2014. Some macros may not work appropriately today.

Interesting analysis, bordering on contemporary globalization. I find this particularly interesting: "And probably the single best way to raise incomes in the rest of the world would be to allow a massive influx of workers from poor countries into rich countries’ labor markets. That would not be good news for less educated, lower-paid rich-country workers." Global inequality and global insensitivity are different faces of a particular coin. Viewpoints of the type herein expressed by Dani Rodrik are necessary for tackling these insensitivities.

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